Rate update: European tantrum boosts US rates

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By G. Steven Bray

Last week’s jobs report was surprisingly strong, but bond markets hardly noticed. Instead, they seem to be laser-focused on the prospects that the European Central Bank will curtail its asset-purchase program.

It may seem odd that something seemingly so distant could impact US mortgage rates, but that’s the effect of interconnected global markets. The yield on the German Bund, considered the safest European debt, jumped right after the ECB announcement. US Treasury and mortgage rates also hopped on board the panic train, but the distance limited the damage.

The ECB announcement indicated that at some point the ECB would have to stop pumping money into the EU economy. The ECB immediately tried to back-peddle to calm markets, but the damage was done. Markets know the party eventually will end, and the ECB must be thinking about the end, or it wouldn’t have made the statement.

For those wanting rates to fall again, the glimmer of hope is recent inflation data. The Federal Reserve’s target rate is 2%. Inflation hasn’t been that high in years, and recent data shows inflation heading down again. This may give the Fed a reason to pause its plans to hike rates and shrink its balance sheet, which would be positive for rates. Markets will be listening carefully to Fed Head Yellen this week during her Congressional testimony for any signs the Fed’s plans may be changing.